Legal briefing | 01 Jun 2018 |

Between a Rock and a hard place?

At first sight, the message of the Supreme Court's recent judgment in Rock Advertising v MWB seems simple: if you want to vary your contract, make sure you get it in writing. But in attempting to create greater certainty in this area, the Supreme Court may have created a new set of problems - particularly for businesses wishing to amend large numbers of contracts at the same time.

What happened in Rock v MWB?

Rock Advertising, which was in financial difficulties, had a licence from MWB to use some serviced office space. It alleged that MWB had orally agreed to accept payment of arrears of licence fees in instalments. The Court of Appeal ruled that there had been an effective variation, despite the presence of a clause in the licence saying that all variations had to be in writing, signed by both parties.

Its reasoning was that English contract law does not generally impose restrictions on the manner in which parties can make contracts (except in relation to deeds, guarantees, contracts relating to interests in land etc). Provided the court was satisfied that the parties genuinely intended to vary the contract, they would be taken to have agreed to dispense with any formality requirements.

What did the Supreme Court decide?

The Supreme Court ruled that the oral variation was ineffective because of the presence of the "no oral modification" clause. It made it clear that where the contract says that variations must be dealt with in a particular way – as most contracts do – then a non-compliant variation will generally be invalid. The one exception to this is where it would be "unconscionable" for one party to deny the effectiveness of the variation based on estoppel – which is discussed further below.

Lessons from Rock v MWB

The obvious lesson of the Supreme Court ruling is that contract variations should generally be made in writing and should comply with any formalities (e.g. signature) specified in the agreement. Such an approach greatly reduces the scope for subsequent disputes about what changes were actually agreed. But there are situations where it's not easy for businesses to secure compliance with the formalities specified by a typical variations clause – these are explained below.

What's the problem?

Take the example of a business with over 100 customers which needs to vary the way in which it supplies its services – perhaps because one of its own suppliers has become insolvent and the replacement supplier cannot deliver the service in exactly the same way. The business writes to all its customers asking them to sign and return the variation. Most of them fail to do so.

Six months later, the changes have been implemented, mostly without objection. But one customer – which, for reasons of its own, is looking to terminate early – argues that the variation is not valid. This in turn enables it to argue that the supplier is in material breach - because the services are no longer being provided in accordance with the original contract terms.

The limitations of estoppel

The Supreme Court suggested that an informal variation could still be upheld based on estoppel i.e. in the example above, the business could argue that the failure to object to the changes made it "unconscionable" for the customer to maintain that the variation was invalid. But the bar to prove estoppel appears to have been set quite high, since it requires "some words or conduct unequivocally representing that the variation was valid notwithstanding its informality." If the customer has done nothing more than passively accept the amended services, it may be difficult to argue that this amounts to unequivocal acceptance of them. The customer might argue that, at best, its conduct amounted to a temporary waiver which could be revoked at any time.

Until we have some cases which consider estoppel in the light of the Supreme Court ruling, it is difficult to say how the courts will approach this issue. One possibility is that courts will seek to distinguish between situations involving alleged oral variations (where a stricter approach may be adopted) and those where the variation has been set out in writing, but signature formalities have not been complied with (where the approach could be more lenient). In practice, much will also depend on the nature of variation and how customers react to it. However, if you find yourself in the position of the business in our example, you could consider the measures set out below:

            
        Practical steps where it's difficult to get variations signed
    
Consider specifying a period during which customers can object to the changes. Indicate that if they fail to avail themselves of this, you will regard this as acceptance of the variation (even if the necessary formalities have not been complied with).
Consider timing the implementation of the variation so that it coincides with say, a payment due from the customer. The making of such a payment could be presented as a positive act by the customer signifying acceptance of the change.

Unilateral variation

When it comes to future contracts, suppliers such as the business in our example may want to consider whether their standard variations clause should allow for certain types of changes to be dealt with unilaterally by notice.

A wide-ranging right to vary the contract unilaterally is likely to be resisted strongly by customers. A more acceptable alternative, however, could be to limit the right to situations where, for example, there is a change in service provision that does not materially affect the service outcome from the customer's perspective.

Read Richard Brown Profile